People all around the globe are currently struggling to pay numerous loans. If you’ve heard of debt consolidation and would like to know if it’s a viable option for you, then it’s this is the perfect opportunity to learn the ins and outs of this debt refinancing.
What is Debt Consolidation?
Debt consolidation involves taking out a new loan to help you pay off your other consumer debts and liabilities. It typically refers to unsecured debts. You combine all of your smaller debts into a single larger debt that usually comes with more favorable terms. This is most ideal for people who owe $10,000 or more.
You could get a lower payment each month, reduced interest rates, or a combination of both. You can use the money from this loan to pay your credit cards, student loans, and other assorted liabilities. This can reduce your stress levels because it’ll streamline everything into a single payment.
This type of debt refinancing has its pros and cons so make sure to get all the information you can before applying for a debt consolidation loan.
What requirements you need
Here is what you will need to prepare if you decide to go ahead:
- Proof of income
- Credit history
- Creditworthiness or financial stability
- Collateral or equity
Sample of documents you will need to prepare:
- Proof of employment or letter from employer
- Two months’ statements for every loan or credit card you want to pay
- Letters from repayment agencies or creditors
Once everything is ready to go, you have to decide which one to pay first. The lender will decide this in a lot of instances. However, you should go for the one with the highest interest rate if you get a choice. When you pay this debt, you’ll move to the next one until you pay everything off. As long as you follow the plan, you can be debt-free in a few years.
Secured vs Unsecured Loans
When it comes to debt consolidation loans, there are two broad types available. You can choose a secured or unsecured loan.
• A secured loan uses your assets like a car or home as collateral. If you don’t pay your debt, you run the risk of losing whatever you put up for collateral.
• Unsecured loans do not have assets as collateral. This can be a relief, but it can also make them much more difficult to get. They come with lower qualifying amounts and higher interest rates to help minimize the risk.
Both types of loans usually come with lower interest rates than you’ll get with credit cards. A lot of these loans have fixed interest rates. This means that they won’t fluctuate over the time you repay them.
Your Most Common Options For Loan Consolidation
You have several options available when you consolidate loans into one larger payment. We picked out the most common ones for you below.
• Traditional Banks and Peer-to-Peer Lenders
The majority of traditional creditors like peer-to-peer lending platforms, credit unions, and banks offer debt consolidation loans. They’re great for borrowers who are having trouble managing the size of their debt or the number of monthly payments. If you want to pay down several high-interest debts, this is the option you want to choose because you get a lower rate and one payment per month.
• Balance Transfer Credit Cards
A second option you have is to take all of your current credit card debt and transfer it onto a new balance transfer card. This card usually gives you a set amount of months to pay down your balance with a 0% interest rate. Look for cards that come with promotional offers or bonuses. The goal is to pay down as much debt before the 0% APR stops.
• HELOC
Home equity lines of credit or home equity loans are another way you can consolidate your debts to make them easier to manage. As a bonus, you can typically deduct the interest on this loan from your taxes as long as you itemize all of your deductions come tax time. Your home is the collateral in this loan option, and this means you run the risk of losing it if you don’t or can’t pay it.
• Student Loans
You have several debt consolidation programs available for your student loan debt. The federal government sponsors many of these consolidation programs. You can use the Federal Direct Loan Program to consolidate any non-private loans you have into one easy payment with a lower interest rate. To get the interest rate on this new loan, the company will look at the weighted average of all of the previous loans’ interest rates.
You should note that opting in and getting debt consolidation services doesn’t erase your debt. All it does is transfer it to a different type of lender or loan. If you need debt relief and don’t qualify for a loan, debt settlement is a solid option. The goal of debt settlement is to reduce how much you owe instead of the number of creditors you owe. You’ll work with credit counseling services and debt settlement companies to try and negotiate your debts with the original lenders.
5 Steps To Getting A Loan Consolidation
Once you make up your mind, these are the steps you will be going through:
1. Get a good grasp of your expenses and income. List down your total monthly income alongside your total monthly expenses. This will allow you to get a good handle on how much you can afford to set aside for your debt consolidation payments.
2. Next, confirm your credit score. The higher your credit score, the likelier you are to get approved and even get lower interest rates. Remember that your goal is not just to consolidate your payables but also to get a lower interest rate in the process.
3. Make a list of all the debts you want to consolidate. Include your credit card balances and other high-rate debts.
4. Check out the different loans available to you whether they are from banks, credit unions or online lenders. Compare and contrast their charges and repayment schemes. Make sure that the latter fits in with your monthly income and expenditure.
5. Choose the best option for you and start the loan application process. Make sure to read all fine print including penalties.
Although your credit score may potentially suffer and your payment schedule may take longer, if it will help you clear all your debts in the long run, then you should come out on top.